Tax Treatment: It’s All About Structure

When an employee is terminated, the question often arises about the tax treatment of amounts paid to the employee. Structuring can allow employers to provide different benefits to the employee without increasing the overall cost to the employer. Possible strategies include characterization and timing.

Characterization

Treating payments as employment income can result in significant deductions and therefore less immediate income to former employees, particularly with lump sum payments. Characterizing payments as "retiring allowances" can significantly reduce tax withholdings. Retiring allowances are also exempt from Canada Pension Plan (CPP) and Employment Insurance (EI) deductions.